RISK ALLOCATION OF
FOREIGN FUNDED INFRASTRUCTURE PROJECT A CASE STUDY IN SOUTH EAST SULAWESI
MAUL HASWORO
RISK ALLOCATION OF
FOREIGN FUNDED INFRASTRUCTURE PROJECT A CASE STUDY IN SOUTH EAST SULAWESI
MAUL HASWORO
A thesis submitted in fulfilment of the Requirement for the award of the degree of Master of Science (Construction Contract Management)
Department of Quantity Surveying Faculty of Built Environment Universiti Teknologi Malaysia
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DEDI CATIO N
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ACKNO WLEDGMENT
Alhamdulillah. That the first thing that I want to say when I finish writing this research.
I also would like to show my gratitude to Dr. Sarajul Fikri bin Mohammed, as my thesis supervisor, for his guidance and direction, and all faculties and lecturers at Faculty of Built Environment, for their valuable knowledge and support. As addition, I also would like to express my appreciation to BP-KON KEMEN-PU for funding my study at UTM, all staff and personnel of EINRIP Project, particularly for Southeast Sulawesi Province for valuable information and data, and all KEMEN-PU scholars 2011-2012 as well as all friends at KTGB for enjoying time we spent in UTM.
Last but not least, I also would like to show my love, devotion and gratitude to my beloved wife and parents for their prayer, compassion and support for me.
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ABST RA CT
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TABLE OF CONTENTS
CHAPTER TITLE PAGE
TITLE
DECLARATION
DEDICATION
ACKNOWLEDGEMENT ABSTRACT
ABSTRAK
TABLE OF CONTENTS
LIST OF FIGURES LIST OF TABLES
1 INTRODUCTION
1.1 Background 1
1.2 Problem Statement 4
1.3 Objective of research 5
1.4 Scope of research 6
1.5 Significance of research 6
1.6 Methodology 7
1.7 Thesis structure 8
2 LITERATURE REVIEW 2.1 Introduction 9
2.2 Risk and Project Performance 10
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2.2.2 The Implication of Risks on Project Performance 11 2.2.3 Managing the Risks 12 2.3 Potential Risks in Foreign Funded Infrastructure Project 15 2.4 Taking Account Risk in Contract Clause 19 2.5 Project Organization and Procedure for Foreign
Funded Infrastructure Project 20
2.6 Construction Contract in Indonesia 23 2.6.1 Government Contract: Ministry of Public Works 24 2.6.2 International Standard Form of Contract: FIDIC 25 2.6.3 MDB Harmonised Conditions of Contract
for Construction 26
3 RESEARCH METHODOLOGY
3.1 Research Design 28
3.1.1 Preliminary Study 28
3.1.2 Objective Formulation and Research Question 29
3.1.3 Sampling Method 31
3.1.4 Data Collection Method and Technique 32
3.1.5 Data Analysis 32
3.2.4 Risk Allocation as Result 34
4 RISK ALLOCATION IN CONTRCT CLAUSE
4.1 Introduction 36
4.2 Overview of the Project 36
4.2.1 General Data of the Project 37 4.2.2 Parties Involved in Project Management
and Implementation 41
4.3 Risk Identification 43
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4.3.2 Contractual Parties Perspective on
Potential Occurrence of Risks 51
4.4 The Magnitude of Risks 59
4.4.1 The Magnitude of the Risk’s on Project’s Quality 59 4.4.2 The Magnitude of the Risk’s on Project’s Duration 66 4.4.3 The Magnitude of the Risk’s on Project’s Budget 74 4.5 Taking Account Risk in Contract Clause 88 4.5.1 Contract System of the Project 88 4.5.2 Risk Allocation in Contract Clause 89
4.6 Summary 94
5 CONCLUSION AND RECOMMENDATIONS
5.1 Introduction 96
5.2 Conclusion 96
5.2 Research Limitation 99
5.3. Recommendation 100
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LIST OF FIGURES
FIGURE NO. TITLE PAGE
2.1 Chart Flow of Risks Management 12
2.2 Actions in Response Risks 14
2.3 The Degree of PPP in Construction Project 21
2.4 Risks in Construction under FIDIC Red Book 26
3.1 Research Methodology 35
4.1 Province Targeted of EINRIP Project 39
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LIST OF TABLES
TABLE NO. TITLE PAGE
3.1 Potential Risks in Foreign Funded Project of External Aspects 29 3.2 Potential Risks in Foreign Funded Project of Internal Aspects 30
3.3 List of Respondents 31
3.4 Contractual Party’s Perspective on the Occurrence of the Risks 33 3.5 Contractual Party’s Perspective on the Magnitude of the Risks 34
4.1 General Data of the Project 37
4.2 Summary of Roles and Responsibility for EINRIP Implementation 46 4.3 KMO and Bartlett's Test of Risks at National/Regional Level 51 4.4 KMO and Bartlett's Test of Risks at Construction Industry Level 51
4.5 MSA Value of Risks at National/Regional Level 53
4.6 MSA Value of Risks at Construction Industry Level 54 4.7 KMO and Bartlett's Test of Risks at Project Company/Management Level 55 4.8 KMO and Bartlett's Test of Risks at Project Implementation Level 55 4.9 MSA Value of Risks at Project Company/Management Level 56 4.10 MSA Value of the Risks at Project Implementation Level 57 4.11 Resume Identified Potential Risks in Foreign Funded Project 58 4.12 KMO and Bartlett's Test of the Magnitude of Risks at National/Regional
Level on Project’s Quality 59
4.13 MSA Value of the Magnitude of the Risks at National/Regional Level on
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4.14 MSA Value of the Magnitude of the Risks at Construction Industry
on Project’s Quality 61
4.15 KMO and Bartlett's Test of the Magnitude of Risks at Construction
Industry Level on Project’s Quality 62
4.16 KMO and Bartlett's Test of the Magnitude of Risks at Project
Company/Management Level on Project’s Quality 62 4.17 MSA Value of the Risks at Project Company/Management Level
on Project’s Quality 64
4.18 MSA Value of the Risks at Project Implementation Level on Project’s
Quality 65
4.19 KMO and Bartlett's Test of the Magnitude of Risks at Project
Implementation Level on Project’s Quality 66
4.20 KMO and Bartlett's Test of the Magnitude of the Risks at National
Regional Level on Project’s Duration 66
4.21 KMO and Bartlett's Test of the Magnitude of the Risks at Construction
Industry level on Project’s Duration 67
4.22 MSA Value of the Magnitude of the Risks at National/Regional Level
on Project’s Duration 68
4.23 MSA Value of the Risks at Construction Industry Level
on Project Duration 69
4.24 KMO and Bartlett’s Test of the Risks at Project Company/Management
Level on Project Duration 70
4.25 KMO and Bartlett’s Test of the Risks at Project Implementation
Level on Project Duration 70
4.26 MSA Value of the Risks at Project Company/Management Level
on Project’s Duration 72
4.27 MSA Value of the Risks at Project Implementation Level
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4.28 KMO and Bartlett’s Test of the Risks at National/Regional Level
on Project Budget 74
4.29 KMO and Bartlett’s Test of the Risks at Construction Industry
Level on Project Budget 74
4.30 MSA Value of the Risks at National/Regional Level on Project Budget 76 4.31 MSA Value of the Risks at Construction Industry Level on Project Budget 77 4.32 KMO and Bartlett’s Test of the Magnitude of the Risks at Project
Company/Management Level on Project Budget 78
4.33 KMO and Bartlett’s Test of the Magnitude of the Risks at Project
Implementation Level on Project Budget 78
4.34 MSA Value of the Risks at Project Company/Management Level
on Project Budget 80
4.35 MSA Value of the Risks at Project Implementation Level
on Project Budget 81
4.36 Risks based on their Magnitude on Project Performance at National Level 82 4.37 Risks based on their Magnitude on Project Performance at Construction
Industry 83
4.38 Risks based on their Magnitude on Project Performance at Construction
Company 84
4.39 Risks based on their Magnitude on Project Performance at Project 85
CHAPTER I
INTRODUCTION
1.1 Background of Research
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domestic investor alone will not fill the 70% gap (Nortonrose, 2010). Thus, the role of foreign investment in infrastructure development in Indonesia is quite significant, regarding to the statement of Ministry of Finance that the need in increased FI in Indonesia was not mainly due to the lack of budget, but more (particularly) to improve efficiency, expertise and quality of services (Nortonrose, 2010).
Moreover, the development of the transport sector is critical, as this sector, together with electricity, is the key to economic development, by which this area needs to be prioritized (Nortonrose, 2010). According to Baum and Tolbert (1985), economic growth and social development are impossible without adequate transport (in Amrullah, 2006). This becomes more important in Agricultural Country, like Indonesia. Research on transportation as one of non price variable of agricultural product has identified that it had significant effect to agricultural product in Latin America (Chibber 1999 in Amrullah, 2006). It is not surprising that around 0.8% Domestic Revenue of developing countries is spent in road construction, development and rehabilitation (Fay, 1999 in Amrullah, 2006). In Indonesia, among 83 policies in sector policy of Infrastructure Policy Packet established by the Committee in 2006, as described above, that of transportation sector set 22 policies (Amrullah, 2006).
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five years, this province has got support from foreign fund from various international donors for road construction. And, in the next future years, South East Sulawesi Province expects to increase the budget to enhance the development in this region, from local and central government as well as from foreign sources.
Furthermore, foreign funded projects are considered as high risk business, especially in term of external risks, mainly because of the large size of the project and the international issues involved (Zhi, 1995). Meanwhile, unmanaged or unmitigated risks are one of the primary causes of project failure (Lyons and Skitmore, 2002). Risk management, which involves risks identification; risk analyses, and risks mitigation/response, is needed to minimize and control the risks as well as to ensure the achievement of project performance in term of cost, time and quality. Risk identification, involving identifying resource and type of risks, is the first important step in the risk management process (Hayes et al., 1986; Williams, 1995 and Godfrey, 1996 in Perera et al 2009). After that, likelihood of occurrences, the magnitude and impact of the identified risks are analyzed. However, construction risk can hardly ever be eliminated, but they can be transferred or shared from one party to another through contract clauses (Perera et al, 2009). Contract clauses will determine the “tenure” of risk: who will responsible on (what) particular risks and how to manage the risks. Contract clauses become the prediction and early mitigation of the risk. Thus, proper risk allocation in construction contracts has therefore come to assume prominence because risk identification and risk allocation have a clear bearing on risk handling decisions (Perera et al, 2009).
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Unfortunately, there are only few discussions on risk allocation in contractual clauses whereas contract clauses are the prediction and early mitigation of the risk. Besides, this issue is one of the major obstacle investments in Indonesia. As identified by Nortonrose (2010), that 95% respondents perceived the legal and regulatory risks to be the most significant barrier to investment. It was described that too many of the cash flow stream require a degree of trust, which is not bankable. Nortonrose (2010) also identified that 91% respondent consider international arbitration as the preferred option in managing the risks. Arbitration clause in contract can give a hand the project turning into bankable.
Regarding to above argument, this research will discuss risks allocation in contract clause of road construction supported by foreign fund in South East Sulawesi Province.
1.2 Problem Statement
Road condition and its network availability have become one of the major issues of development in South East Sulawesi Province, as more than 50% of provincial road is categorized as damage, ranging from light damage until heavy damage (Indonesian Bank, 2011). In the last five years, this province has got support from foreign fund from various international donors for road construction. And, in the next future years, South East Sulawesi Province expects to increase the budget to enhance the development in this region, from local and central government as well as from foreign sources.
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mitigation/response, is needed to minimize and control the risks as well as to ensure the achievement of project performance in term of cost, time and quality. However, construction risk can hardly ever be eliminated, but they can be transferred or shared from one party to another through contract clauses (Perera, et al, 2009).
Brainstorming is the most common technique used in identifying the risk (Lyons and Skitmore, 2003).The contractual parties’ perspectives on the potential risk as well as their magnitude and impact become important to obtain a clear view of the risk event. These perspectives should be taken into account in contract clauses. In this manner, contract clauses become the prediction and early mitigation of the risk. This may help the parties to be clear on risk handling decisions.
Therefore, there are three research questions in this research, namely:
1. What are the potential risks in foreign funded project particularly in road construction regarding to contractual parties perspectives?
2. How the magnitude on those risks to project’s performance? 3. In what extend are those risks coped in project contract?
1.3 Objectives of Research
Objectives of the research are to:
1. To identify potential risks in foreign funded project particularly in road construction in South-East Sulawesi Province in Indonesia
2. To identify the magnitude on those risks to project’s performance.
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1.4 Scope of Research
The scopes of this research are:
1. This research will focus on the National road construction located in South East Sulawesi Province in Indonesia
2. This research will focus on foreign funded project namely for road construction which is sharing with National Budget (APBN)
3. The discussions will emphasis on private foreign investment on financing the project, regardless to the private participation in building, operating and maintaining the project.
1.5 Significance of Research
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1.6 Methodology
Methodology of this study is provided in Chapter 3 of this thesis. Generally, it divides into six stages:-
(i) preliminary study;
Preliminary study will be conducted through literature review in order to identify the gap in study risk management of road construction. Discussion with key informant namely senior government also conducted in order to assess availability of data and potential risks in the project.
(ii) objective formulation and research question;
Objectives are set to be achieved and research question is formulated to guide this research based on the preliminary study.
(iii) sampling method selection;
Sampling of this study is the parties who directly involve in the project namely donor, employer, bidding committee, consultant and contractor.
(iv) data collection method and technique;
Data will be collected from the project administrator in headquarter office and in site office. There will be a questionnaire that will be answered by the parties who involved in the project.
(v) data analysis;
The analysis of potential risks and the magnitude of the risks will use SPSS version 16 program.
(vi) taking account risks into the contract.
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1.7 Thesis Structure
Chapter 1 presents introduction of the research which contains background of research, problem statement, objectives of research, scope of the research, and significance of research.
Chapter 2 presents the literatures review of risk allocation in contract clause, particularly in the case of construction project in Indonesia.
Chapter 3 presents methodology of the research.
Chapter 4 presents the project overview, the parties involved in the project and their responsibility, data analysis, and taking account risks in contract clause.
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